A trend toward higher quality has demanded more strategic investments in the transaction of coffee supply in Brazil. Instead of internalizing this transaction, one firm, illycaffè, has challenged the vertical integration assumption by adopting contracts to coordinate its supply. Aiming to investigate whether this firm is losing economic efficiency in terms of coordination, or whether it is being efficient due to a proper definition and allocation of property and decision rights, the purpose of this paper is to analyze the transaction attributes of illycaffè’s suppliers according to the vertical integration dilemma.
The research design is based on a survey of 105 coffee growers analyzed through probit regression. Using a transaction costs approach, the study empirically tests whether well-designed contracts can act as a hierarchy by following the efficient alignment hypothesis.
The results emphasize asset specificity, uncertainty and incentives as determinants for being an illycaffè supplier. In other words, these findings demonstrate that a well-designed contract can substitute a hierarchy based on transaction costs economics. It contributes by illustrating other coordination alternatives overlapping vertical integration, even in environments of high uncertainty and asset specificity, which encourages other private strategies based on allocation of property and decision rights of hybrid arrangements.
The study adopts a unique survey about transaction costs in the transactions of high-quality coffee supply in Brazil. The main contribution is to shed light on the cases where, how and why contracts can substitute the need for in-house production, and to guide private and public strategies using this background.
The authors thank illycaffè and Università Del Caffè Brazil for their support. This study was also partially financed by the National Council for Scientific and Technological Development (CNPq) – Brazil. The authors have well-defined property rights over remaining errors and omissions.
Oliveira, G.M.d., Zylbersztajn, D. and Saes, M.S.M. (2019), "Can contracts substitute hierarchy? Evidence from high-quality coffee supply in Brazil", British Food Journal, Vol. 121 No. 3, pp. 787-802. https://doi.org/10.1108/BFJ-01-2019-0048Download as .RIS
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